MENU

2 Costly Mistakes Investors Make

One of the challenges of being an investor is being able to differentiate luck from skilful investing. Investors, myself included, are often culpable of self-attribution bias. This means we are more likely to attribute good outcomes to our action and blame bad ones on unforeseen circumstances.

By doing so, we make ourselves susceptible to forming bad habits in investing or misconceptions that can cost us dearly in the future.

With this in mind, I have decided to highlight two costly mistakes that are commonly repeated by investors.

Too short a time horizon

Some investors may make money by buying and selling stocks within a short time frame. However, unbeknownst to most of them is that these short-term profits are more luck than skill. I know of too many investors who tell me heroic stories of their escapades in the stock market where they have made small returns here and there in a few days.

These one-off successes egged them on further and led to more attempts at such short-term gains. Unfortunately, this luck will eventually wear off and those who attempt such “easy-money tactics” would end up paying the price.

The unpredictable nature of short-term market volatility makes investing with a short-term game plan extremely difficult. Investors should instead have a long-term approach to investing, which tilts the odds considerably in their favour.

Investing in IPOs with media buzz

This year, Singapore witnessed two of its homegrown technology companies finally go public. Both these companies attracted tonnes of media buzz and raised an eye-watering $1.5 billion in total. Because of the hype surrounding these initial public offerings (IPOs), many investors make the mistake of buying the shares and then take pleasure in the “IPO-pop” after the first day of trading. However, how often do newly listed companies make good long-term investments?

Just last year, Warren Buffett reiterated his aversion to IPOs. He believes that newly listed companies are more risky investments because of their shorter history and IPO issuers selecting a price that benefits them rather than the buyer. Unsurprisingly, many of these companies end up failing to live up to the initial IPO hype and have cost investors dearly.

Although it is possible that some newly listed companies go on to make wonderful investments, it is better for retail investors to view the early phases from the sidelines before deciding to invest.

The Foolish bottom line

Learning to differentiate luck from skill is vital in ensuring we develop the right mindset about investing. Just because we may have made money in an IPO stock or have made short-term gains, it does not make the strategies any less risky than they really are.

Meanwhile, for more (free!) investing insights, sign up here for your FREE subscription to The Motley Fool's investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.

Like us on Facebook to keep up-to-date with our latest news and articles. The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.